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Why Did Micron’s Storage Division Post Negative Operating Margins?

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Performance in storage division

In this series, we have discussed how Micron (MU) is shifting away from the PC (personal computer) segment towards other fast-growing segments. In fiscal 4Q15, the company’s storage division posted revenue of $848 million, down 6.5% year-over-year. The unit reported an operating loss of $46 million as compared to operating profit of $27 million in fiscal 4Q14.

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Overview of SBU

Micron’s SBU (storage business unit) sells NAND flash components in the enterprise and cloud storage and removable storage markets. NAND flash memory is a non-volatile storage technology that retains data even when the power is off. This segment also includes the sale of NAND flash to Intel (INTC).

Falling sales

SBU’s sales and profits are largely dependent on the average selling prices of NAND flash, sales volume, and cost per gigabit. The segment’s sales have been falling for the past four quarters mainly because of a reduction in the sales volume driven by a shift in the firm’s NAND flash production to high growth markets such as mobile and embedded products.

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Negative operating margins 

The segment’s operating margins were negative because of the huge expense incurred in the development of next generation flash storage technologies. Under the IMFT joint venture, Micron launched the 3D NAND technology and also developed a breakthrough technology called “3D XPoint,” which could replace NAND and DRAM in the future.

In the 3D NAND space, Micron will face competition from Toshiba Corporation (TOSBF) and SanDisk (SNDK), who plan to start mass production of their 3D NAND flash technology in 2016.

SBU’s strategy

SBU will continue to optimize product mix between higher value and lower value segments. Micron’s M500 SSD (solid state drive) family for hyper-scale storage has gained traction among higher value enterprise customers. The company offers TLC (triple-level cell) NAND flash to its lower value segments. It will begin shipping consumer SSDs based on TLC in fiscal 1Q16. The company will continue to spend on developing next generation flash storage. The SPDR S&P 500 ETF (SPY) has a 0.10% exposure in Micron.

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